It's The Economy, Stupid

I’m told the Energy Minister, Craig Leonard, is one of the brightest lights in the Alward Cabinet.  The strange, almost weird, language used in this article makes me wonder.  It is possible the journalist misquoted him or the words got jumbled but..  Here are some passages:

Leonard said NB Power has a debt management plan and is not having difficulty covering its payments.

NB Power has significant stranded debt.   ‘Making its payments’ is like you have a $500k mortgage on a house worth $200k but you are able to make your payment every month that cover interest charges and a small portion of principal.  Eventually, someone is going to pay big time.

He said it is incorrect to add together the deferral account for Lepreau, which is expected to reach $2.4 billion, and the utility’s net debt of $4.6 billion.  The deferral account is where expenses relating to the purchase of replacement power and other administrative costs are placed, to be paid over the next 30 or so years.  ”You can’t lump them together.” Leonard said of the utility’s debt and deferral account.  ”It (Lepreau) will be on the books as an asset rather than as debt and the point of that asset is it acts like an account receivable, and over the next 30 years people will pay for the Lepreau refurbishment through their rates.”

That’s about as fishy as a five day old Pickerel washed up on the beach.    A deferred revenue account is just an accounting trick – but it still has to be paid back just like debt and it incurs interest payments just like debt.

The deferred revenue account is what is killing Enbridge Gas NB.

As for the refurbishment of Mactaquac, I don’t see this happening at all.  It’s too huge a debt load.    There’s a reason why the Energy commission made several references to purchasing power from our neighbours.  We will eventually be buying our power from Hydro-Quebec and still paying down this huge debt over 30? 40? years.

There are no easy answers but trying to position NB Power as as company in good shape with a business model based on low power rates for customers – is fast becoming fantasy.  I think these guys know it and the public posture is meant to reassure New Brunswickers.

Tom Adams, an energy consultant and nuclear safety expert based in Toronto, said the debt levels at NB Power threaten the economic stability of New Brunswick.  ”The scale of NB Power’s debt casts a shadow over the whole picture of public finance in New Brunswick,” Adams said in an interview Friday.  ”This debt is guaranteed – it’s sovereign debt. The electricity decision-making in New Brunswick has turned the province into the Greece of Canada.”

I have met Tom Adams – he’s an interesting cat.  I think his comments are the flip side of Leonard’s.    Leonard would like people to think that a deferred revenue account is an ‘asset’ for New Brunswickers – i.e. a value for taxpayers rather than $2.4 billion more the utility will have to extract from New Brunswickers – and Adams would have us believe we are Greece.

Neither one is right.  Because of a variety of decisions, New Brunswickers are going to have pay down a huge debt burden over the next few decades even as more generation assets are mothballed.    This is why I disagreed with the three year rate freeze.  The government should have imposed reasonable increases and used the money to pay down debt but politics and energy are a toxic mix in this province.  Further, we may lose large industrial projects if the rates are not changed or a new workaround is found.  We used to have cheap energy – now we do not.

As for Adams, out total debt burden (government and NB Power combined) is still within a reasonable range of the average of Canadian provinces.  If the government doesn’t balance the books soon, that could change but right now it is not at a crisis situation.  I would put NB Power and power rates at a far higher crisis level than overall sovereign debt in New Brunswick.  I would further put Enbridge and natural gas related debt (mostly Leonard’s definition of an asset) at a critical level.

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This guy says that 418,700 New Brunswickers are on Facebook.  I will be interested to see his methodology when the report comes out.   There are about 750,000 New Brunswickers but 73,000 of them are nine years old and under.  Another 81,000 are over the age of 75.    This means that unless lots of Grannies and babies are using Facebook, about 70% of New Brunswickers have a Facebook account.

We know from the latest Stats Canada data that 30% of New Brunswick’s 330,000 households do not have the Internet (the lowest percentage, by the way, in Canada).

If we take a leap and say that very few people in a household with no Internet would have Facebook accounts (this is a stretch – they could have Facebook and use it at the library or they could have a smart phone….) – that would mean that just about 100% of  New Brunswickers of age (and under 75) and with the Internet at home has a Facebook account.

Given that there are two people of age in my home without Facebook accounts, this is unlikely.

So, I wait with anticipation to see the results of this study.

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After I spoke on CBC Info Morning last week about shale gas development in New Brunswick I got a few emails – a couple in agreement with my view and a couple opposed.  One guy from Nova Scotia sent me a long response taking issue with my position and reiterating a lot of the views about the process of fracking and why it should be disallowed in New Brunswick (and presumably Nova Scotia).  Because he had put time into that email, I spent a little time thinking about a response.

But the truth is that I really can’t debate the science.  I doubt 99.9% of us really can.  We can get worked up by terms, labels, etc. but in the end, there are a number of government and industry websites that provide the counterpoint and that suggest hydro-fracking – under the proper controls and oversight – is not much more dangerous than other forms of gas extraction.  But I really am not confident debating the science.  I know from many other controversial debates in this province – notably NB Power’s sale to Hydro-Quebec – that there is no point trying to change the minds of folks adamantly for or against an issue.  The focus is always on those folks in the middle.

As an economic development advocate – someone who believes deeply that New Brunswick needs new sources of economic activity and tax revenue – if someone was trying to change my mind on this, they would have to show me why shale gas extraction should be disallowed here while allowed mostly everywhere it is being developed across North America.  There are a few exceptions but from western Canada and up and down the eastern seaboard, hydro-fracking is the principal way that new sources of nat gas are being exploited.

President Obama talks about natural gas – the new sources from shale – as a key transitional fuel in his energy strategy. The U.S. Energy Information Administration forecasts that shale gas extraction will grow strongly in the coming years to the point that there is talk about exporting natural gas from the U.S. – an unthinkable proposition just a few years ago.

So if there is going to be shale gas exploration – the question for me is why not here?

If there was a Canadian or North America-wide moratorium because the science overwhelmingly said we should stop – I would say fine.   But the central question for me is why should a province that desperately needs new economic activity – exclude shale gas while numerous areas are not.

It is possible that western Canada will extract more natural gas and the federal government will transfer some of that new wealth down here to pay for our public services but, just for once, I’d like us to focus on generating our own tax revenue.

I’ll end with this.  I had a conversation last week with an older fellow that lives in Elgin.  He told me the gas development firm had his water tested for him before the exploration began and would be back to test again after to ensure no problems with his water.  He went on to tell me that many of his friends have water purifiers and have bad water from agricultural runoff.    I thought this was interesting.  Not many people want to ban agriculture in New Brunswick.

This guy was very sensible and pragmatic about it.  He said we should definitely move ahead with shale gas development.  I suspect given the hype, his view is a minority position right now.

For some reason we seem to be quick to worry about environmental issues but breeze over economic issues without a second thought.

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I met NS Premier Darrell Dexter this week for the first time.   He seems to be one of those politicians operating at a speed just a little faster than the rest of us – energetic and fully engaged.

In a way Dexter and his NB counterpart David Alward came into office at the wrong time for an ambitious politicians.

I have talked about this before but if you think back to 1999 when Bernard Lord took office, the call centre sector was adding about 1500-2000 new jobs per year, there were large infrastructure projects such as highway twinning, refinery expansions, etc.  As a cherry on top, Lord was able to start expanding the public service again at a rapid rate.  From a job creation and economic development perspective, Lord had to do very little.  He cut the small business tax to the bone and then made speeches in other parts of Canada about his economic genius.

In reality, 1999 was the ideal time to embark on a serious economic development agenda.  The U.S labour market was tightening, global firms were expanding, the IT industry was just starting to boom (despite the dip in the early 2000s).  There was all kinds of opportunity to attract investment – on top of all the government spending, call centre expansions and large infrastructure spending.

Even Shawn Graham benefitted from the stimulus spending which masked the core weakness in private sector investment and jobs.

Now Alward faces declining private sector job creation, no large infrastructure spending and the need to rein in public spending and public sector job creation.

No matter what happens, without a miracle, New Brunswick is looking at an extended period of employment weakness just at a time when we need it.

The best Alward can do is develop a serious economic development plan (such as we needed in 1999), land some early wins and start to chip away at it.  I still maintain we need 3,000 to 4,000 new private sector jobs – good paying jobs – each year just to ‘break even’ – whatever that really means.

I guess optimists say that good leaders step up when the going is rough.

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I think I might have mentioned one time that I have a Google Alert set up for the word ‘equalization’ and I get an email on a daily basis showing references to articles, reports, etc. with this key word.    Literally on a weekly basis there are multiple criticisms of the unfairness of Equalization – virtually all in newspapers in Ontario and Alberta – and how places like NB are sucking Alberta dry (this column in the Telegraph Journal this morning is a notable exception).  We are told that regional subsidies are worth about 5% of Ontario and Alberta’s combined economic output (interesting given that Ontario is now an Equalization receiving province).

We have debated this issue ad nauseum here but I will reassert my position that this will eventually have an impact.  Large, systemic changes to how government works don’t happen overnight. They happen over a long period of time after proponents have beaten on the drum over and over again.  This drum has been beating since at least Mike Harris in Ontario and certainly since the late 1990s in Alberta.  NB and PEI, we are told, have lavish public services at the expense of poor Alberta which has far fewer nurses than NB for example.

As always happens with arguments, they get more sophisticated over time.  Instead of only complaining about New Brunswick gold plated public services paid for by Albertans, the secondary message (aimed at Ottawa) is that equalization itself is dragging down the Maritimes, politicizing economies and creating the culture of defeat. This argument is meant to encourage maritimers to realize the true source of our problems.

It is likely that Quebec is the only reason why the equalization system hasn’t been ratcheted down in recent years.  Quebec, although receiving far less equalization than New Brunswick on a per capita basis, gets far more on an absolute basis and would be seriously cranky if the program was cut back.

Now that Harper has his majority without much representation in Quebec, it will be interesting to see the dynamic around regional transfers.

In theory – just theory mind you – regional economic development should be a Tory idea.  Not the whole subsidy train but government investments and policies that strengthen the conditions for economic development.

Don’t forget the federal investment in Hibernia was a Tory idea.  I wonder if the feds are lined up to support shale gas development in New Brunswick?

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I am involved in an increasing number of economic impact studies and I am clear with clients that there is a huge difference between projects that increase economic activity and those that just recycle it.  An economist once joked that if you ran an economic impact assessment  for every industry in a province (direct and the ‘spin’ effect – indirect and induced) combined they would equal double or triple the size of the economy.  In other words, when it comes to economic impact, the sum of the parts is far greater than the whole.

I had this feeling when I read the new economic impact analysis of Dalhousie University.  These are meant to show – mostly to government- how valuable an industry or institution is to the economy.  This makes sense to me but I think they need to be far more clear with the reader about the magnitude of the impact.

I really prefer the Conference Board’s term ‘economic footprint’ when it comes to industries that base their economic activity primarily on the local market.  Foot print is a better term because it doesn’t imply that if Dalhousie went away, all the economic activity would be lost which is exactly what these assessments are meant to do.  Dalhousie University, according to the research, accounts for 10,000 direct, indirect and induced jobs, a billion in GDP and $243 million in taxes.  The implication is this is what is at risk if Dalhousie left (total impact).

The reality is that something like 80% of the spending is from Nova Scotia sources -government, tuitions, corporations, etc. and that money – if not going to Dalhousie would be going elsewhere (say, to Acadia or STFX).  So the net loss – economically –  from losing Dalhousie would be what is brought into the economy each year in tuition, research grants, etc.  from outside the province and even at that you could argue that some of that money would still flow to other institutions.

The real economic value from Dalhousie is hard to quantify and has to do with research, innovation, skills, – the heft it brings to the Nova Scotia economy from its brainpower.  It would be harder to argue that government diverting what it spends on Dalhousie to other targets would have nearly the same effect.

This is a vital distinction and one I hope everyone gets.  It is not just semantics.

A few years ago the convenience store association in Canada did a study and found that their members created xx thousand jobs, yy GDP and zz taxes for government.  What an impact.  They also didn’t mention this was more of a ‘footprint’ analysis rather than an ‘impact’ analysis because if they went away all of the spending on convenience stories would still remain in the economy – it would just go elsewhere.

Contrast this will the big shipbuilding project proposed for Halifax.  This would be all new money coming into Nova Scotia.  New technology.  Strengthened supply chains.  Tens of millions in new, real tax revenue for government (as compared to recirculation).  Thousands of new jobs.

If people don’t get this, they need to re-read and study harder.

Governments end up spending enormous amounts of taxpayer dollars and effort recirculating economic activity because they don’t get this simple point.

Don’t get me wrong.  In Dalhousie’s case – government spending is likely worth every penny.  But to suggest – or even infer there is $243 million in tax revenue to government each year that would not exist without Dalhousie is just not true.

The economists will scold me and say this is implied in the analysis but they know full well that governments don’t think that deeply about it.

Again, the Conference Board approach is the most honest because of footprint analysis implies the ‘share of economic activity’ taken up by an industry not it’s ‘impact’.

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Despite the newishness of the provincial and now federal governments, I sense a subterranean melancholy among a lot of folks involved in the development of this province.  I talked with another old timer recently who suggested that New Brunswick’s only competitive advantage – cheaper to do business and lots of people willing to work a lower wages – was all but disappeared.  He cited the growing number of NB-based manufacturers importing Romanians and other east Europeans to work for $11/hour in their factories.  He also mentioned the slow erosion of call centre jobs.   How does a place like New Brunswick compete for business investment and win?

I think we need to get back to fundamental thinking on this stuff.  It’s no time to panic.   1) There is a pool of global capital.  2) Companies and individuals want to invest that capital in locations and industries where there good profits to be made. 3) Jurisdictions need a share of this investment in order to support their economy and the tax revenues needed to pay for public services. 4) Jurisdictions that have a track record of attracting investment* are those where there  is a clearly defined case for profitability.

I think it is important to get back to fundamentals.  We get all bogged down in the minutiae and even theatre associated with the practice of economic development and we forget the most fundamental issues.  We need to be a place that can attract enough business investment to support our community and social objectives and in order to do this we have to be a place where there is a clear understanding of the profit potential of investing here.

Guys like me argue that a focus needs to be put on specific sectors of the economy.  In other words, New Brunswick cannot be a place for every type of business to have an outsized profit potential but it could target specific industries and clear map out the path for profitability here.

If we think fundamentally, we can ask how come we have 600 people working in economic development spending over $200 million a year – conservatively – among all levels of government – and we have no net private sector job growth in a number of years?  Why we don’t have this conversation is simple.  We have atomized economic development into dozens of different actors, diluted accountability and set up a system that allows fingers to point in every other direction but inward.   Quite frankly, I don’t even blame the actors involved.  Most of them are trying to carve out their niche in complex and byzantine world.   Someone told me recently that there are companies in New Brunswick that can access financial incentive programs from almost two dozen different government departments and agencies (depending on the industry they are in).

Do we want a forest products industry?  I think we should – it tends to pay relatively good wages, supports rural communities, involves good, honest work and has a very solid multiplier effect throughout the economy.  But if we want this industry to thrive, we have to foster the conditions under which the actors can make a good return on their investment.  Sure, there will be good and bad years and broader market conditions will upset everyone but at the end of the day if it is structurally more profitable to invest in South Carolina, or British Columbia or Russia for that matter that is where the investment will go.

Do we want to grow an IT industry?  I’m not talking about computer maintenance, ten dollar websites and government gravy.  I’m talking about companies investing here (and starting here) that build products and services for global markets.  If so, we have to be a place where they can make a buck and then we have to go and tell them they can make a buck here.

I could go through the list. Aerospace?  Life sciences?  We have been whipping these rhetorical horses for years and none of them are moving ahead in any sustained way.  Obviously, we are either not that good a place to invest or we are not selling ourselves to the right decision makers.  To risk a bad pun – it really isn’t rocket science.

We love to get all bogged down in bureaucracy and programming and all the other trappings of process.   There are dozens of funding programs.  There are hundreds of people do program development, business plan analysis, small business counselling, financial audits to support grants and loans, sector specialists, on and on.  All doing their little parts – many quite well – but it rolls up to a system that isn’t working by any measure.   When I tell this to my colleagues some get quite indignant.  They argue they are doing good work.  I don’t doubt it but when you look down from above all they are doing is – at best – keeping it from getting worse when economic development per definitionem is supposed to be about making things better.

So let’s remain optimistic for a little longer.  Andy Scott is trying to build some heft into the intellectual and academic research side of economic development.  Hopefully the academics will be able to get through in a way that guys like me can’t.  The provincial government seems to understand most of this stuff – in fact the last government seemed to as well.  Maybe there is serious interest in rethinking this stuff.

I think we need to take out two sheets of blank paper.  On the first, we should sketch out what we want to do – at the highest level – to get us on some kind of path to economic sustainability.  On the second sheet (it may be more like a book) we need to tally up all the agencies, departments, extra-government organizations, funding programs, etc. etc. etc. (don’t mind me my daughter was in the King and I) and truly reset the system.  We may or may not be able to consolidate much of what I call the ‘banking function’ under one roof.  We may be able to get far more leadership and industry support from associations and other industry groups.  We may be able to consolidate our ‘innovation’ assets in a single entity.  Whatever.  We just need to keep our eyes on the ball.

Right now we are too busy trying to help under 25 year old entrepreneurs leverage Facebook into business contacts or rural small businesses hook up to the Internet.

*Again when I talk about investment this is in the most generic sense – it’s money flowing in – it can come in the form of capital for local entrepreneurs to expand or multinationals setting up here.

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The migration from voice communications back to text-based communications is pretty amazing.  150 years ago virtually all communications of any distance (beyond shouting) was done by the written word.  Even 50 years, most customer service, any kind of formal business communications, etc. was still done by writing it down.  Then we went into the voice age  - think 1-800 – where people communicated primarily by talking to one another.

Now we are witnessing  a wholesale move back to text.  My daughter might make a couple of calls a week on her cel phone.  Maybe.  She sends between 2000-3000 text messages per month.

This extends of course into the corporate world.   Consumers want to interact with companies now by email or social media.  They want to express their opinions via blogs.

This has huge economic development implications.  I talked with a firm yesterday that has a relatively small call centre-type operation in New Brunswick and they are increasingly interacting with customers via email, blogs and social media.  They are also having to write far more formal text than even a few years ago.  This is micro-sites for specific products, formal online information about a product or service, briefing notes to clients, etc.

This is just exploding.

For New Brunswick, it means we should be leaning into copy writing as a primary skill taught in high schools, community colleges and universities.

I have been told by a couple of university professors that New Brunswick kids in general are not as good writers because most of them are learning to write in two languages simultaneously.   I am not sure of the validity of this but I do know that 15 years ago when we were talking to companies about moving call centres here writing skills were hardly mentioned.  Now it is critical.

I took a quick look and I don’t see a single copy writing or social media content editor program at the NBCC.   I don’t think there is any real emphasis on on this at the high school level.  Once again, New Brunswick will be the last into the game.

If I was the guy behind the curtain pulling the levers and pushing the buttons, I would turn out hundreds of community college graduates with social media content editing skills and I would promote that fact to the world.

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I dip my toe into the economic development incentives pool in my column this morning.  This tends to be a subject that gets people worked up.  There is a group of folks that deeply oppose any kind of government ‘incentives’ to attract or foster business investment.  There are others that are more pragmatic.

You will note that I hardly mention the role of government as a bank for business.  In my mind, the banking function and incentives are two different things.  The government as bank model is based on the government putting aside money – say $100 million – and then deciding what companies get a chunk of that money.  That model necessitates hundreds of staff across the province evaluating business plans, trying to match small businesses to funding programs, developing ever more elaborate funding mechanisms, doing financial due diligence just like a bank, etc.    This is a world view where mostly local firms don’t have enough cash to fund startups and expansions and the government should step in and play that role.  The argument is that the private banking system is dysfunctional in a place like NB.

When I talk about ‘incentives’ I am talking about business investment that has a choice where to go.    Companies that are able to put their business investment in the jurisdiction that makes the most sense to them.  In that competitive reality, New Brunswick needs to have a value proposition that is attractive relative to other jurisdictions (this value prop goes way beyond incentives) and that can easily include tax holidays, low royalty regimes, discounted rates on public utilities, etc.

I touched briefly on a point worth reiterating.  I do not think New Brunswick should give away the farm to get a little business investment.  The fire sale approach to economic development has been tried and failed in a lot of places.  You can make up for a weak value proposition by ever increasing government largess towards the business.    Governments, industry, education and other key stakeholders need to make the kind of investments that build the underlying case for businesses to invest and incentives end up being a small part of the overall package.

Very few people would buy a very crappy car just because there was a deep sale on it.   If they did fall for it once, they wouldn’t make the same mistake twice and they would tell all their friends the car was very crappy.  It’s the same with economic development.

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I was talking with a friend in Ontario who tells me that McGuinty’s green energy agenda is going to be a wedge issue in the Ontario election.  The Tory leader is promising to scrap the deal with the ‘foreigners’ Samsung and drop/eliminate the feed-in tariff program for wind, solar, etc.   I am not sure about this as it seems the Liberal’s trouble is likely more due to just length of time in office.    These days it seems the voters are less likely to vote parties in over and over.

It seems to me that McGuinty needs to hammer his economic agenda around this.  As I have posted before the green business was only a small part of it.  If it was only about green energy, as Ignatieff rightly pointed out, you could bring down hydro-electricity from Northern Quebec and Labrador and wipe out all the carbon emitting electricity production in a decade – at costs well below wind, solar, etc.

But for McGuinty, his real goal was to create a green energy cluster in Ontario.  Tens of thousands of jobs in manufacturing, R&D, head offices, services, etc. and the price for that was a rise in the average cost of electricity by some percentage (this percentage is debated but most of Ontario’s new power is going to be natural gas and nuclear powered).  He is gambling the public will accept a modest increase in power rates in return for the jobs and the taxes.

The Ontario government has probably the best sense of its economic reality of any province in Canada.  It knows that it cannot rely on royalty revenue such as NL, SK and AB.  If it loses economic activity in a foundational industry such as auto manufacturing, it has to be made up elsewhere.    Green energy seemed like a logical play.

You know my view on this stuff.    If government can be a major customer that seeds a new industry (think telecom in Ottawa) that is a valid way within reason to promote economic development.  I contrast that with New Brunswick which now has more installed wind energy than any other province except PEI as a percentage of its energy demand and virtually no indigenous industry – a little bit on the support side but no manufacturers, very little product-based R&D, very few jobs in services.   This is Ontario’s vision.  All the value added economic activity there.  Provinces like New Brunswick consume and send them money back to Ontario.  Just like auto, aero, pharma, much of finance, a lot of ICT, etc.    We consume products/services manufactured in Ontario.

Hudak’s promises, however; could end up causing considerable economic upheaval.  Can you put the Genie back in the bottle?   Or maybe the Genie can go back into a barrel, not a bottle?   All the companies, including Samsung, have only created a fraction of the promised jobs.  If they all cancel their expansion in Ontario, what happens?

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